(9 am. – promoted by ek hornbeck)
I’m not an economist, nor do I play one on the blogs. All of this talk about Wall Street and our financial institutions is something that, up until a few months ago, I was blissfully ignorant about.
Over the last couple of weeks, I’ve been reading like mad to try and understand, not only what’s happening, but what the potential solutions would be. I probably have enough information about Obama’s plan to be dangerous (I call it Obama’s plan because the fact of the matter is that its his administration. I have no illusions that he is supporting Geithner under duress or that someone is twisting his arm to do so). The so called PPIP has been dissected pretty thoroughly both by those who support it and those who don’t.
Where I am lacking in information is about the alternatives. As I see it, there’s no really painless or “right” way out of this mess. So the fact of the matter is that it is entirely possible that Obama’s plan is the best of the possibilities. And if that case is to be disputed, then I need to learn more about the options. As Saul Alinsky said in his “Rules for Radicals”:
The price of a successful attack is a constructive alternative.
Never let the enemy score points because you’re caught without a solution to the problem.
The problem is, I’m hearing a couple of alternatives proposed, but not getting enough by way of details to evaluate them. So I thought I’d put out my questions and see if my fellow bloggers can help me out.
One potential solution that isn’t getting much serious attention is that we do nothing and simply let the whole system collapse. I’ve heard at least one person suggest that we could simply use the money being spent on the bailout to take care of the basic needs of those who would loose their jobs, homes, retirement, etc. I’m not sure alot of people support this idea and its hard for me to even visualize the possibility of a total global collapse of the economy. But if someone could make a case for what this would look like and how it wouldn’t lead to a tremendous amout of chaos (which usually brings violence in its wake), I’d be interested in hearing about it.
The alternative most often given as an alternative is to put these financial institutions into receivership or nationalize them. Here I have tons of questions.
My first one is about whether or not this is even possible or legal. From what I’ve read, the FDIC has the authority to put banks into receivership. The main companies that are the biggest part of the problem (Goldman Sachs, CitiGroup, etc.) are not (just) banks – they have grown much beyond that function. It has been suggested that nationalization of companies like this would not be legal UNLESS Congress passes the new regulations proposed by the Obama administration last week. Is this, in fact, a barrier to nationalization?
The second question I have is that if it were possible to nationalize these institutions, what do we do with the fact that they don’t just operate in this country, but are global companies. Is that another barrier to nationalization.
Thirdly, when a company is nationalized or goes into receivership, what happens to the bond and equity holders in the company? Do they loose their investment? And if so, it seems like that would have a HUGE impact across the spectrum of the economy. But I’d like to learn more about that.
Fourthly, I wonder what happens to my small, but wonderfully run local bank in the process. I assume they would not be nationalized. But I also wonder how they would be affected by the process.
Finally, everyone I hear talk about nationalization seems to be referring to what the FDIC does now with banks, which is also called receivership. Basically the FDIC takes over the banks, reviews its assets and liabilities, and sells it off to another bank/financial institution. It seems to me that too often when this option is proposed, many of us assume that it means long-term public ownership. But I don’t think that’s what the economists who recommend it have in mind.
If we are, indeed, talking about receivership, a recent case is that of IndyMac (tiny in comparison to the giants we’re talking about), cost the taxpayers $10.7 billion dollars. What would receivership of Goldman Sachs or CitiGroup cost us?
That’s most of my questions unless there are other options I haven’t heard about yet. The criticisms of Obama’s plan have been laid out pretty extensively and they make sense to me. But if I’m going to advocate for an alternative, I need more information.